While President Bill Clinton’s economic advisers see Germany’s generous social benefits and its sophisticated factories staffed by well-paid, well-trained workers as models for the United States, Germans see a looming crisis of competitiveness and a declining standard of living. No, those six weeks of paid vacation and that 37-hour workweek haven’t vanished into history. Labor-management councils still give German workers a voice in management that Americans can only dream of, and 45-year-olds with children to feed still cannot be fired. But even as it staggers under the cost of rebuilding its formerly communist east, Europe’s most powerful economy is struggling to adjust to the same global forces that have destabilized economies from Sweden to Australia. Warns Norbert Walter, chief economist at Deutsche Bank Research in Frankfurt, “What we will be confronted with is a threat to German industry.”
The bad news has been flying thick and fast as Germany tumbles into recession for the first time since 1982. Ball-bearing giant FAG Kugelfischer said last month it would cut 6,300 jobs. Thyssen Steel expects to lay off nearly 4,000 of its 57,500 workers this year. Robert Bosch, a big supplier of electronic components to the auto and machinery industries, now has 23,000 employees in Germany working short hours. Things will get worse before they get better: with inflation running around 4 percent, the German Bundesbank has been reluctant to ease up on the high interest rates that have killed off economic growth all across Europe, and last Thursday’s slight rate cut won’t be enough to keep unemployment from rising.
Beyond those cyclical problems, however, German industry is facing the same long-term changes that have had America on edge since the late 1980s. If you’ve heard Washington’s lobbyists calling for government to promote leading-edge industries, the German debate about reorganizing research programs to increase competitiveness will sound pretty familiar. “Lean production” is in vogue as competition from U.S. and Japanese imports forces companies to cut costs and to set up factories in low-wage countries like Hungary and the Czech Republic. Sprawling industrial conglomerates are shedding marginal operations as they cut back to their core businesses. And German manufacturers who figure that quality can compensate for high labor costs are painfully registering that they may be delivering more than customers are willing to pay for. In a stunning departure, incoming Mercedes-Benz chief Helmut Werner warned recently that his company’s world-renowned cars are “overengineered” and could be priced out of the market.
Pessimism, to be sure, is almost a chronic condition in Germany. The country is far from a basket case; the stores on any Hauptstrasse bulge with consumer goods, and they’re still closed Sunday so salesclerks can have their leisure. But there’s no denying that the much-praised German model is showing many of the strains Americans have felt for, years:
Since the 1960s, Germany has been a magnet for foreigners who prized tedious jobs Germans rejected; any German who deigned to enter a factory could easily find work. But times have changed. BMW’s showcase auto-assembly plant in Regensburg has hired more than 6,000 people, many of them assembly-line workers, since it opened in 1986, but now that it is running full blast, “The number of jobs in the plant will gradually decline,” says manager Dieter Hendel. While craftsmen are still in short supply, in Germany, as in the United States, no one wants unskilled labor. Cuts in the administrative ranks are just beginning. They promise to be even more painful than those in America, since Germany has no dynamic small-business sector to replace the white-collar jobs big companies eliminate.
German managers disdain American executives’ enthusiasm for mass firings, but job security isn’t what it used to be. “People are getting used to the idea that there are going to be more layoffs and that the big companies won’t be offering so many jobs,” says an executive at an autoparts company that itself has cut back. Health-care and unemployment-insurance benefits will be less generous, too. At Berghofer, a family-owned company in Kassel making specialized hoses, new production workers get only six-month or one-year contracts; the best may get permanent offers, but the others will have to move on. Temporary employment is discouraged by law, but a growing number of companies are giving this American practice a try.
Germany’s apprenticeship system may be the envy of the world, but it’s hit hard times at home. Despite automatic entry into a high-paying technical job after three-and-a-half years of training, young Germans don’t want to be machinists and toolmakers; they’d rather go to college. That means that today’s apprentices, on average, don’t measure up to their predecessors. “The young people don’t come with the mathematical skills we expect,” says Wolfgang Schreck, who trains apprentices at the ITT Teves brake-system plant in Frankfurt. Meanwhile, the universities are turning out thousands who can’t find the white-collar jobs they dream of. By Walter’s reckoning, more Germans are studying to be architects than apprenticing in all the building trades combined.
The new realities are hitting east Germany with special force. Chancellor Helmut Kohl’s government had been counting on west German industry to take the lead in reinvigorating the former communist zone. But German companies, like American companies, are focusing on using excess plants more efficiently before they build new ones. If they were to build, many would favor Eastern Europe, Germany’s Mexico, over high-wage, low-productivity east Germany. Some that did go east are already regretting it. Bavarian-based Maho, which makes machine tools, took over a longstanding tool works in Seebach got rid of most of its 257 models and introduced a small family of advanced milling and boring machines. That looked like a smart move in 1990, when the demand for machine tools seemed infinite. Today, however, the Seebach plant is building less than half as many machines as expected and its 330 workers are taking in repair jobs to keep busy. Says engineering director Dieter Winkler, “We designed a good factory, we planned on a strong economy and now, well, it’s a shame.”
Despite Germany’s travails, living standards are under far less pressure than those in America. Unions are still powerful enough to make sure that average workers hold on to their share of the pie. While social problems like homelessness are more visible than they once were, all political parties are pledged to support the basic structure of the German welfare state. But the era when the skills of German workers and the technology of German industry guaranteed better times for all has come to a close. In the hypercompetitive global economy of the 1990s there are no guarantees. Germans have to get used to that, just as Americans are doing.
GROSS DOMESTIC PRODUCT FOR FORMER WEST GERMANY ONLY
1990 1991 1992 1993* 4.9% 3.6% .8% -1% *NEWSWEEK ESTIMATE SOURCE: GERMAN FEDERAL STATISTICS OFFICE
title: “The German Problem” ShowToc: true date: “2023-01-09” author: “Margaret Harris”
“We Germans still aren’t sure of our place in the world, or where we’ll end up.” –Editor Georg Gafron of the Berlin tabloid BZ
Remember the German question, a.k.a. the German Problem? It’s back.
Once upon a time the specter was of German militarism. During the cold war, with West Germany tied to NATO, it evolved into a fear of excessive pacifism–the possibility that Germans might forge a separate peace with the Soviet Union in exchange for unification. Recent years have brought concerns that the country might grow too muscular, becoming a European uber-power that would bully its neighbors and abandon the politics of Europeanness in favor of Germanness.
Berlin’s independent demarche over Iraq has raised the old bogey anew. “We will go our special German way,” Chancellor Gerhard Schroder told cheering crowds at his campaign rallies in the run-up to Sunday’s election. His flat rejection of German support for military action against Iraq, even under a U.N. mandate, has angered America and left Germany isolated in Europe. A “reckless” adventure in “German unilateralism,” reads the summary of reactions from across the continent–epithets usually reserved for George W. Bush.
You wouldn’t have known from the headlines. But in fact the real German Problem has little to do with foreign policy. To borrow a phrase from Bill Clinton, it’s the economy, Dummkopf. Whoever emerges as Germany’s next chancellor (and as news-week went to press, it was nip and tuck between Schroder and his challenger, Edmund Stoiber), he will have to do much more than dig his new government out of a diplomatic hole over Iraq. The country is an economic mess. And unless it musters up the will to change and work another “economic miracle,” the prospect is for a prolonged decline that could drag down Germany and the rest of Europe with it.
What a change. For decades Germany has been Europe’s locomotive, a well-honed machine that exported not only fine products but prosperity to the world. Yet today it’s a laggard–“the sick man of Europe,” as the European Central Bank’s chief economist, Otmar Issing, puts it. Where Germany once was the very embodiment of fiscal prudence, pushing its EU partners toward monetary stability and sound budgets within a single euro currency zone, it’s now Europe’s biggest delinquent, whose free-spending ways and out-of-control deficits threaten the entire European financial framework it worked so hard to create.
The litany of hard times is by now familiar. Unemployment stands at 4 million, or 9 percent of the work force. Germany trails all of Europe in economic growth and job creation. Consumer spending is down for the second year; business bankruptcies are at an eight-year high. Some economists fear that Germany will slide into what David Barker, chief economist for Moore Capital in London, calls a Japanese-like spiral of deflation and economic stagnation.
Indeed, Germany seems bent on an almost willful path of economic self-destruction. Every other nation in Europe has cast its lot with market-based reforms as they retool their economies and work forces for the 21st century. The Netherlands and Sweden long ago began revamping their famous welfare states. France passed a radical tax cut. Italy is trying to reconfigure its labor market. Portugal has slashed social services to get its unruly budget deficit within EU guidelines. But Germany has chosen the opposite road. It’s spending more, not less, on welfare. New laws have even more tightly regulated its labor market; unions have been given more rather than less power in hiring, firing and corporate management.
Eight years ago NEWSWEEK examined this “German Disease”: a paralyzing, dysfunctional mix of coddled workers, notoriously meddlesome bureaucrats, powerful labor unions and entrenched industrial lobbies. Since then, for all the reforms elsewhere, little has changed in Germany. Its workers are still the world’s costliest. Yet they’re so heavily taxed that their standard of living is substantially lower than their American or Japanese counterparts’. They still work the fewest hours and enjoy the longest vacations. Yet working so little seems to make them ill: in all the industrialized world, few call in sick more often. Yes, they enjoy unrivaled benefits and job security–but those who haven’t priced themselves out of the market can’t get new jobs because companies are loath to risk hiring someone they’re stuck with when business gets bad. A study by the government Labor Bureau reveals that as many as 2 million unemployed aren’t even looking for work, mostly because they’re better off on benefits. All told, Germany now ranks 47 out of 49 industrialized countries in “adaptability and flexibility,” according to the 2002 World Competitiveness Report –by the International Institute of Management Development.
More and more, Germany resembles a society stuck in another age. It has one of the lowest shares of females in the work force. (Alone in Europe, its schools send their pupils home at noon; the tax code penalizes two-income families.) The country’s service sector is woefully undeveloped, from the understaffed restaurants that tourists complain about to chronic shortages of child care, nurses and cleaning staff. Powerful guilds and cartel-like trade associations, many with roots in the Middle Ages, keep strict tabs on who can take up a profession–and make sure there’s not too much change or competition. Unravel this absurd bureaucracy and its stifling rules and regulations, and Germany could create half a million new jobs almost overnight, according to the government’s own Commission on Monopolies.
The irony is that few Germans would have it any other way. As with Iraq, Schroder called this, too, “our own German way.” Nor did he get any disagreement from Edmund Stoiber, whose cri de guerre is “No American methods”–notwithstanding his promises to modernize and re-energize the country. Such attitudes owe much to history. Their turbulent 20th century left Germans with a yearning for stability, coupled with a deep fear of conflict and change. After the war, the country engineered a uniquely “German model” of political, social and economic organization that enshrined consensus and government-corporate partnership as the foundation of a generous welfare state. It worked for an impressively long time–until the inroads of international competition caught up with the costs and inefficiencies of maintaining that massive “nanny state.” Today the German model for success has become the German model for decline.
Ask most economists how to break out of the trap, and you get clear answers. Roger Kubarych at Hypovereinsbank in New York ticks off a list: create incentives for small businesses–the prime source of new jobs–to set up or expand. Do the same for Germany’s shriveled services sector, particularly in retailing, information technology and health care. Rewrite laws that hold back entrepreneurs. Loosen labor laws. Revamp and simplify the country’s cumbersome tax code. Above all, deregulate, deregulate, deregulate. But when it comes to actually acting on such proposals? “Shifting is scary,” Kubarych acknowledges. “Politicians know that, and so they temporize.”
Temporize, indeed. Virtually every effort in recent years to reform Germany’s economy, or change its social mind-set, has failed. Remember Helmut Kohl? One reason he lost to Schroder’s Social Democrats in 1998 is that he dared to propose cutting Germany’s unlimited sick leave to 90 percent of a worker’s full wage. Remember, too, his efforts to level the playing field for German corporations saddled with high labor costs–by foisting Germany’s labor laws on the rest of the European Union. Schroder has more recently crafted a similar strategy, bashing Brussels for trying to curb special protections that shield many German businesses from unwelcome competition: carmakers, banks, pharmacies, the national railroad. He is also locked in with the unions, Germany’s most reactionary lobby. They’ve made him set strict legal limits on part-time and freelance work, and a new law expands their powers to co-manage companies. As for the opposition, Stoiber entered the arena preaching renewal. But his recipes (a little tax cut here, a little change in the labor law there) seemed dwarfed by the problems at hand.
Nor is there any real popular pressure to do things differently. Few Germans think their economy is truly sick. Most seem content to see what the future brings, so long as they keep their jobs and social benefits–a mind-set that has brought Japan to such grief. Already, the German government redistributes some 50 percent of GDP. Yet a recent Allensbach poll finds that 59 percent of Germans feel their society is becoming more rather than less unjust. There is too much inequality in society, they say–and too much freedom.
This, in the end, is the essence of the “German way.” A preference for social security over individual freedom, for more government intervention rather than private enterprise, for more bailouts of businesses instead of letting good companies grow and bad ones fail. Almost half of Germans think it’s the government’s responsibility to create jobs and spur the economy. Those who say otherwise tend to be regarded as freaky extremists. Hans-Olaf Henkel, an ex-IBM manager and retired head of the Federation of German Industry, recently published a book called “The Ethics of Success,” suggesting that Germany’s problems can be cured only by a stiff dose of market economics. The response: vilification even in the mainstream media. At speeches, he’s been pelted with eggs.
Germans simply don’t want to debate the point. They seem to prefer ignoring uncomfortable demographic and economic trends that herald an economic meltdown: an aging population that will shrink from 82 million today to 64 million by 2050, for instance, even as pensions consume an ever-larger share of GDP.
Nothing speaks to this fact more eloquently than the recent election. It was exciting as a political cliffhanger. But where were the issues? Neither candidate offered a plausible plan for getting Germany going again. Neither charted a transforming vision for the future. In any case, that’s not what voters wanted to hear. What whipped them up was Schroder’s blasting Bush on Iraq, not to mention his fiscally openhanded promises to tide Germans through hard times, budgets be damned. After all, this is the nanny state. Slumping or not, few Germans wish to change it, even if that will ultimately threaten their survival as a global economic leader. That’s the heart of the German Problem. And given Germany’s place in Europe, it’s a problem its neighbors will have to share.
